Goldman, Morgan to become holding companies

Companies get access to Fed lending in exchange for oversight

WASHINGTON (MarketWatch) -- In yet another extraordinary development for Wall Street, the Federal Reserve said late Sunday night that venerable investment banks Goldman Sachs and Morgan Stanley will become bank holding companies, subjecting themselves to stricter federal oversight.

The Wall Street titans will be allowed to transition into holding companies following a mandatory five-day waiting period, and will be able to take advantage of credit from the Federal Reserve Bank of New York in order to complete the transition.

Upon completion, Goldman
GS, -1.60%
and Morgan
MS, -1.71%
two of the biggest and most powerful investment banks on Wall Street, would join the ranks of and compete with Citigroup
C, -0.23%
JPMorgan Chase & Co.
JPM, -0.62%
Bank of America
BAC, -0.84%
and others.

In becoming holding companies, Goldman and Morgan would get access to the Federal Reserve's emergency lending facilities. But that access comes at a price: greater scrutiny by regulators and new capital requirements.

Amid the greatest shakeup on Wall Street since the Great Depression, Morgan Stanley has been considering a merger with Wachovia
WB, +0.47%
or another bank, and Goldman Sachs had also been under pressure as markets swooned last week.

In a short statement on its Website, the Fed said it authorized the New York Fed to extend credit to U.S. broker-dealer subsidiaries of Goldman and Morgan against all types of collateral that can be pledged at the Fed's primary credit facility for depository institutions. Read the statement.

The Fed also made the same collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.

History in the making

The Fed's move is the latest milestone in a jaw-dropping couple of weeks for Wall Street and American business. Goldman and Morgan were the last two independent investment banks, following the filing for bankruptcy of Lehman Brothers
LEH
and the acquiring of Bear Stearns by JP Morgan this spring. Bank of America, meanwhile, is buying Merrill Lynch
MER, -0.53%

"While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding," said Lloyd Blankfein, chairman and chief executive of Goldman Sachs, in a statement.

"We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources," Blankfein said. Read Goldman Sachs statement.

John Mack, chairman and chief executive of Morgan Stanley, said that the move puts his company in a new and strong position.

"This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position -- with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace," Mack said in a statement.

"It also offers the marketplace certainty about the strength of our financial position and our access to funding," he said. Read Morgan Stanley statement.

Paulson urges quick action on rescue plan

The Fed's announcement came as U.S. lawmakers and officials from the Treasury and the Fed put in a weekend of work on a rescue package for the financial sector that the White House says is necessary to stanch some of the worst damage to the markets in decades.

The heart of the plan is authority for the Treasury to buy $700 billion in mortgage-related assets from U.S. financial institutions over the next two years. The move is aimed at wiping bad debts off of those companies' books and getting the financial sector moving again. On Sunday, Treasury Secretary Henry Paulson acknowledged the risk to taxpayers but said action is essential for the economy.

There's "much greater risk in not doing this than in doing it," Paulson said in an interview on Fox News Sunday. See full story.

Congressional Democrats are attempting to add to the bill, calling for a new stimulus plan to aid taxpayers. But Paulson is calling for prompt action. Passage of the bill could come by the end of the week.

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